Regardless of the causes of the current economic malaise in which the U.S. as well as much of the rest of the world finds itself, theories and blame will abound. To the average American homeowner, the reasons or economic theories behind the current crisis are immaterial. The only question that counts now is “how am I going to be able to continue to pay my mortgage?” or, more alarmingly, “where am I and my family going to be able to live if I cannot pay my mortgage?” Despite (or perhaps because of) an unprecedented period that saw the American dream of homeownership extended further down the economic ladder to hitherto unheard of levels, the number of properties under mortgage has reached astounding levels, estimated to be as high as 80,000,000 in the United States. Most alarmingly, the proportion of those mortgages that are in distress is large and continuing to grow. By some estimates, the portion of homes with a possibility of going into foreclosure may reach as high as 25%. Both newly enfranchised homeowners, as well as long-time homeowners alike, are feeling the stress. These situations, defined as and understood to be “distressed,” run the gamut from homes already in foreclosure, to homes where the owners are a payment or two behind (many with little or no reasonable chance to catch up), to homes where the payments may be up to date, but the present fair market value of the home is well below the outstanding principal balance on the mortgage, which is referred to as an “underwater mortgage.” This last situation is perhaps among the most insidious, as the economic downturn in the housing market effectively robs homeowners, through no fault of their own, of the economic benefit of homeownership, and an inability to refinance using traditional mortgage products since there is no equity in the home. As politicians and government entities float proposals for bailing out the mortgage industry, it is this last component of homeowners who may become the most victimized due the very fact of their financial ability to maintain their mortgage payments. No one seems to be proposing a bailout for them.
What recent years have seen, increasingly, is that computers and the Internet are having an impact on how consumers engage in lending transactions, such as mortgages. Largely gone are the days of manually filling out paper forms, bringing them to a loan officer at the local bank, and anxiously awaiting the lender's decision on the application. For the majority with Internet access and a personal computer, their bank's Web site invariably provides links not to just account info, but also to lending services. Nor is access to this type of on-line service usually restricted solely to those with accounts at the lending institution. Undoubtedly, the banking industry has recognized that correlations between financial services such as lending, and incentives for opening and/or maintaining a deposit account at a specific institution, are quite strong. In addition, if you analyze on-line lending services and processes currently available, particularly in comparison to more general types of on-line commercial transactions, an important factor becomes increasingly apparent. That factor is the unique nature of financial transactions and, in particular, of loan transactions. This uniqueness lies, to a great extent, as already addressed, in the number of variables involved in the transaction and their complex interaction. Although there are currently on-line securities trading and on-line mortgage and loan services, their development and acceptance by consumers appears to have been evolving somewhat slower than for other types of commerce on the Internet. To the extent that sophisticated computer-based programs exist for trading securities in bulk, these are largely directed toward optimizing these rather unique transactions where prices are directly affected by the process of purchase and sale. Nothing currently exists that is designed to facilitate and optimize the process of offer and sale of securities, where specific terms of the security that is the subject of the transaction are dynamically determined through that process, all in a manner designed to optimize the outcome of the transaction for the participants.
The vast majority of on-line transactions (primarily purchases of goods) have one factor in common—the products that are the subject of these transactions are essentially fungible. In this factor lies one of the greatest advantages of the Internet. For the great majority of consumers, the specific source of goods purchased on-line is not a major factor in purchasing decisions. In contrast, financial transactions, particularly lending, involve both products and purchasers that are by no means fungible and are, in many ways, unique. In addition, both seller and purchaser must engage in some form of a mutual evaluation process (underwriting of credit-worthiness) in the course of such transactions. Due to the convenience of computer/Internet access to financial processes such as loan transactions, an individual consumer will find it much easier than in the past to get access to such transactions and, perhaps more importantly, utilize opportunities for finding transactions with terms most favorable to him or her. Once again, computers and Internet access can enable a much greater extent of comparison shopping, whether for a tie for your favorite uncle at Christmas, or a loan on your first or next home purchase.
A number of on-line loan clearing-house operations are now available on the Internet. However, virtually all of these on-line lending services suffer from the same limitations already addressed. Due in no small way to the complexity of these types of transactions, typical on-line lending services do no more than what has been done in the past when all such transactions took place on paper, and in person. Through the use of computer systems and network connectivity, the process of bringing the parties together is more efficient now, but the basic processes remain unchanged, and the form and structure of what products are available to customers remains subject to the same forces that control traditional, “non-digital” transactions.
Regardless of the hows and the whys of the current financial crisis, the present inventors have developed a computer/internet-based process and unique financial instruments that offers the potential for a real solution to the proliferation of distressed mortgage loans as well as replacing the current model for real estate finance.